CODEXCard 6 of 8 · Core Cognitive Biases
Sunk cost fallacy (The Sunk Cost Trap)
Past money is past.
The sunk cost fallacy is the urge to continue a project, purchase or commitment because of what you have already put into it. A sunk cost is any expense that cannot be recovered. Logically it should play no part in the next decision, since it stays spent whichever way you choose.
Yet it does play a part, for understandable reasons. Walking away can feel like admitting the earlier investment was a mistake, and loss aversion makes that admission painful. Economist Richard Thaler, whose work Kahneman discusses, showed how people keep mental accounts and hate closing one at a loss. So we finish a dull book, sit through a bad film or keep funding a failing venture in the hope of making the past spending worthwhile.
The common error is treating quitting as defeat. Stopping is often just reallocating, moving time and money toward something with a better future. A useful habit is to treat staying as a fresh decision: at regular points, ask whether you would start this today, knowing what you now know. If not, the past cost alone is not a reason to carry on.
This links directly to opportunity cost. Every hour and every euro poured into a sunk commitment is unavailable for the next best option, which is where the real price of staying is paid.
Example
You bought a nonrefundable ticket to a concert, but on the night you feel unwell and it is pouring with rain. You drag yourself there anyway because you paid for it. The money was spent the moment you bought the ticket. The real question is whether going tonight is better than staying home.
Try it this week
Pick one ongoing commitment this week and ask whether you would choose it today if you were starting from zero.
From Core Cognitive Biases (Daniel Kahneman · 2011).
